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November 14, 2013 © Wadia Ghandy Singapore LLP Presentation Made For: IE Singapore Presented By: Nicole Shroff, Wadia Ghandy Singapore LLP

LEGAL FRAMEWORK - International Enterprise Singapore/media/IE Singapore/Files/Events... · Presentation Made For: ... • Minimum Wages Act, 1948 • Payment of Wages Act, 1936

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  • November 14, 2013

    Wadia Ghandy Singapore LLP

    Presentation Made For: IE Singapore

    Presented By: Nicole Shroff, Wadia Ghandy Singapore LLP

  • LEGAL FRAMEWORK

    Regulatory Regime

    o Foreign Exchange Management Act, 2000 (FEMA) and notifications issued thereunder;

    o Securities Contract Regulation Act, 1956 (SCRA);

    o Securities Exchange Board of India Act, 1992 and regulations issued thereunder;

    o Consolidated FDI Policy and Press notes issued from time to time;

    o AP (DIR) Circulars issued by Reserve Bank of India (RBI);

    o Companies Act, 1956 and Companies Act 2013 (Companies Act) and rules and regulations issued thereunder;

    o Other central and state legislations depending upon the nature of business.

    Governmental Authorities

    o Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce & Industry;

    o Project Approval Board (PAB), DIPP, Ministry of Commerce & Industry;

    o Secretariat Industrial Assistance (SIA), DIPP, Ministry of Commerce & Industry;

    o Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance;

    o Reserve Bank of India, Ministry of Finance;

    o Securities Exchange Board of India (SEBI);

    o Cabinet Committee of Economic Affairs (CCEA);

    o Competition Commission of India (CCI);

    o Sector Specific Regulators: IRDA (Insurance), TRAI (Telecom) etc.

    2

  • CONTD..

    Economic Laws and Regulations

    Indian Contract Act, 1872;

    Protection of Intellectual Property Rights through the Copyright (Amendment) Act, 2012, the

    Trademarks Act, 1999, Geographical Indications of Goods (Registration and Protection ) Act, 1999,

    Patents (Amendments) Act, 2005 and Designs Act, 2000;

    Labour Laws

    Industrial Disputes Act, 1947

    Trade Unions Act, 1926

    Plantation Labour Act, 1951

    Payment of Bonus Act, 1965

    Payment of Gratuity Act, 1972

    Workmens Compensation Act, 1923

    Industrial Employment (Standing Orders) Act, 1946

    Minimum Wages Act, 1948

    Payment of Wages Act, 1936

    Factories Act, 1948

    Employees Provident Fund and Miscellaneous Provisions Act, 1952

    3

  • CONTD.

    Maternity Benefit Act, 1961

    Employees State insurance Act, 1948

    Contract Labour (Regulation and Abolition) Act, 1970

    Anti Trust Regulations

    The Competition Act, 2002

    Consumer Protection Act, 1986

    Negotiable Instruments Act, 1881

    Sale of Goods Act, 1930

    Arbitration and Conciliation Act, 1996

    4

  • Under the permitted sectors, there are two routes for FDI. Each of the routes are

    regulated separately with conditions.

    Automatic Route

    100% investment in all sectors except those specifically prohibited or those with

    specific sectoral caps.

    Approval Route

    Specified investments shall require Government/FIPB approval.

    proposals that require an industrial license;

    proposals in which the foreign collaborator has a previous venture/tie up in

    India;

    proposals relating to acquisition of existing shares in an existing Indian

    Company by a foreign investor;

    proposals falling outside notified sectoral caps or under sectors in which FDI is

    not permitted.

    5

  • ENTRY OPTIONS INTO INDIA

    6

    Particulars Liaison Office Project

    Office/Branch

    Office

    Subsidiary

    Company/JV

    Company

    Limited

    Liability

    Partnership

    Setting Up

    Requirements

    Prior approval of

    the RBI required

    Prior approval of

    the RBI required

    for BO (other than

    undertaking

    manufacturing and

    service activities in

    SEZs)

    Prior approval of

    RBI not required

    for a PO if

    conditions are

    fulfilled

    If activities fall

    under the

    automatic route

    then no RBI

    approval.

    Foreign

    investments

    allowed in sectors

    which are 100%

    automatic route

    with the prior

    approval of the

    GOI/FIPB

    Compliance

    under Companies

    Act

    Registration and

    periodic filings of

    accounts.

    Registration and

    periodic filings of

    accounts.

    Higher statutory

    compliance and

    filing

    requirements

    Registration with

    ROC. Filing

    annual accounts

    annual statement

    on solvency.

  • CONTD. Particulars Liaison Office Branch

    Office/Project

    Office

    Subsidiary

    Company/JV

    Company

    Limited Liability

    Partnership

    Permitted Activities Only liaison/

    representation/

    communication

    role permitted

    No commercial

    or business

    activities

    allowed to be

    undertaken

    Activities listed/

    permitted by RBI

    allowed to be

    undertaken

    Manufacturing and

    processing activities

    (except in SEZ units)

    not permitted for

    BO

    PO is permitted

    to undertake only

    Specific activities in

    relation and

    incidental to the

    execution of the

    project

    Any activity

    Specified in the

    MOA of the

    company

    Wide range

    of activities

    permitted, subject

    to FDI guidelines

    LLP should

    be engaged in

    sectors/activities

    for which 100%

    FDI is allowed

    without any

    approval

    LLPs with foreign

    investment will

    not be eligible

    to make any

    downstream

    investments

    7

  • CONTD

    Particulars Liaison Office Project

    Office/Branch

    Office

    Subsidiary

    Company/JV

    Company

    Limited Liability

    Partnership

    Funding of local

    operations

    Local expenses

    to be met

    out of inward

    remittances

    received from

    abroad from

    the Head

    Office through

    normal banking

    channels

    Local expenses to

    be met through

    inward remittances

    from head office or

    from earnings

    from permitted

    Operations.

    Funding to be

    through equity

    or other forms

    of permitted

    capital infusion

    or borrowings

    (local as well

    as overseas as

    per prescribed

    norms) or internal

    accruals.

    Contribution in

    the capital of the

    LLP should be

    through inward

    remittance or

    by debit to NRE/

    FCNR account of

    the designated

    partner

    LLP s not eligible

    to raise ECBs.

    Limitation of liability Unlimited Unlimited Liability limited to

    the extent of equity

    participation

    Limited to the extent

    of the agreed

    contribution except

    in case of fraud etc. 8

  • CONTD

    Particulars Liaison Office Project

    Office/Branch

    Office

    Subsidiary

    Company/JV

    Company

    Limited

    Liability

    Partnership

    Repatriation

    of Funds on

    an on going

    basis

    Since the LO does

    not undertake any

    business activity

    there may not be any

    repatriations,

    however, in case of

    closure of the LO,

    any surplus cash

    maybe repatriated

    with RBI approval.

    No approval for

    remittance of

    post tax profits,

    subject to filings

    with the RBI.

    No approval for

    remittance of

    post tax profits.

    Dividends

    declared will be

    subject to

    distribution tax.

    No approval for

    remittance of

    post tax profits.

    Exit

    Mechanism

    Prior approval of the

    RBI, ROC and the

    Income Tax

    Authorities.

    Prior approval of

    the RBI, ROC and

    Income Tax

    Authorities.

    Exit through sale

    of shares or

    winding up or

    liquidation.

    Foreign partner

    permitted to

    transfer its stake

    in LLP/dissolve

    the LLP.

    9

  • FORMS OF BUSINESS ENTERPRISE

    Company

    Sole Proprietorship

    Partnership

    Limited Liability Partnership

    10

  • FUNDING OF INDIAN BUSINESSES

    Equity Share Capital- limited by the authorised capital specified in the MOA. Equity shares need to be

    issued by the Indian company within 180 days of receipt of funds from the investor.

    Preference Share Capital Foreign investment through convertible preference shares, which are

    compulsorily convertible into equity are treated as FDI.

    Debentures and Borrowings - Foreign investment through convertible preference shares, which are

    compulsorily convertible into equity are treated as FDI. Debentures that are not compulsorily

    convertible into equity shares are construed as ECBs and hence need to conform to the ECB

    Guidelines.

    External Commercial Borrowings

    Debt raised in foreign currency by an Indian company. Can be accessed through the automatic or

    approval route from internationally recognised sources. The maximum amount of an ECB that can be

    raised by a corporate other than those in the hotel, hospital and software sectors is USD750mn in a

    financial year. ECBs upto USD750mn for rupee and foreign currency expenditure fall under the ambit

    of the automatic route. Borrowers can be companies registered under the Companies Act and

    Infrastructure finance companies barring financial intermediaries. ECBs have end use restrictions

    and cannot be used for on lending, investment in capital market, acquiring a company, working

    capital, general corporate practice, repayment of existing rupee loan and real estate.

    11

  • CONTD....

    ADRs/GDRs/FCCBs

    Qualified Indian companies can raise equity capital abroad through the

    issue of ADRs/GDRs/FCCBs.

    Approval is required if the issue of the ADR/GDR would result in exceeding

    the permissible limit of investment under FDI and if the investment is being

    made in a sector that requires approval.

    12

  • REPATRIATION OF FUNDS

    Repatriation of capital after payment of taxes, subject to any lock in conditions

    applicable in the sector of investment.

    Remittance of fees for know how, technical services and royalty is permitted subject to

    withholding tax, if any.

    Repatriation of dividends after payment of dividend distribution tax, subject to

    compliance with certain conditions.

    Remittance of up to USD1mn per project (USD10mn for projects in the infrastructure

    space) for any consultancy services procured from outside India.

    Remittance of the reimbursement of pre-incorporation expenses in India is permitted

    upto 5% of the investment brought into the country or 0.1mn whichever is higher.

    13

  • ISSUES FACED BY ENTREPRENEURS

    LAND ACQUISITION ACT 1894 LAND ACQUISITION AND REHABILITATION AND RESETTLEMENT ACT,

    2013

    LAND CONVERSION

    LICENSES AND PERMITS AND APPROVALS forest and environmental clearances

    CORRUPTION

    COMPLICATED EXITS Shutting down is cumbersome no single window clearances; Selling out may be

    subject to capital gains after the Vodafone judgement (taxation as a representative assessee),

    Buyback, Pricing issues (DCF).

    LABOUR LEGISLATIONS TOO MANY TOO COMPLICATED AND TOO STRINGENT

    SUCCESSION TO CRIMINAL LIABILITY no developed regime for mistakes of predecessors.

    CASH TRAP reduction of share capital, buy back (buy back tax), dividends (dividend tax), loans.

    RESPONSIBILITY

    WEIGHTS MEASURES ACT, 1976 REPLACED BY THE LEGAL METROLOGY ACT, 2009 increased

    compliances

    14

  • CONTD.......

    INADEQUATE FUNDING reluctance by Banks to lend, disregard guarantees being given

    by NHAI for project loans. Debt (very structured), Equity (mez funding is a problem

    because of the restriction on transfer of shares, pay out to the investor is fettered by the

    pricing guidelines)

    COST ISSUES - infra companies have more than SGD300 crores locked up in on going

    road projects. Officials are reluctant to approve even routine cost escalations because

    questions raised by the auditors.

    DISPUTES OVER PROVISIONAL TARIFF for a new power station - declared unconstitutional

    by the Kolkata High Court.

    Some of the commercial issues that affect foreign investors operating in India are:

    inadequate handling of statutory legal compliances by the Indian partner;

    management control i.e. (Indian corporate laws over ride any private contractual terms

    between the joint venture partners, unless such terms are addressed and reflected in the

    Articles of Association of the company);

    protection of intellectual property rights; and

    double taxation issues.

    15

  • DISPUTE RESOLUTION

    Typically, a good dispute resolution clause includes reference to:

    the law governing the contract and dispute;

    the procedure to be followed;

    the method of resolution (ie, arbitration or litigation);

    for arbitration, the complete process, including constitution of the tribunal, applicable procedure,

    venue and language; and

    for litigation, the jurisdiction of the courts.

    16

    Supreme Court

    High Court

    District and Sessions Courts

    Sr. Sub Judge (Civil Cases) Chief Judicial Magistrar

    (Criminal Cases)

  • ARBITRATION

    Bharat Aluminium Company Ltd (BALCO) Vs. Kaiser Aluminium Technical Service Inc (Kaiser)

    Facts:

    Kaiser was to install a computer based system at Balcos premises.

    The arbitration clause in the Agreement provided for Indian governing law but arbitration proceedings

    to be governed and conducted under English law.

    Disputes arose and BALCO approached the district court and high court for reversal of the arbitral

    award. The appeal was reject by both courts. Therefore BALCO appealed to the Supreme Court.

    Decision and Prevailing Position in Law:

    Part I of the Arbitration and Conciliation Act, 1996 would only apply to arbitrations having their

    seat/place in India.

    Indian courts do not have power to grant interim relief when the seat of arbitration is outside India.

    Distinction between seat of arbitration and place of arbitration.

    17

  • SUGGESTIONS WAY FORWARD

    Extreme Approach - Change the laws through corporate lobbying.

    Balanced Approach

    Entrepreneurs should structure innovative products with minimum regulatory hindrances.

    Effective strategising

    enter into legally enforceable contracts.

    contract should include adequate promoter responsibility clauses to ensure that

    the promoter delivers in time.

    avoid the promoter and the contractor being one and the same to minimize conflict

    of interest issues (as in EPC road contracts).

    dispute resolution clause in the agreement should be carefully worded and in line

    with international norms and standards.

    Dedicated disaster management team to foresee risks in a project and have

    alternative effective strategies. (eg in a road construction project, if the NHAI

    approval is not obtained)

    18

  • CONTD........

    Advanced rulings can be obtained to tackle prospective transfer pricing issues.

    Shift from BOT mode (Build operate transfer)to EPC mode (Engineering Procurement and

    Construction), the latter gets govt. aid.

    Single window clearance was proposed in Dec 2012.

    Government is trying to minimise transportation costs by encouraging coal suppliers to supply 80% of

    required level of coal to projects closer to the mines.

    Enactment of the State Electricity Distribution Responsibility Bill to make states more responsible for

    the financial health of the electricity boards, the bill envisages periodic revision of tariffs,

    restructuring the debt of electricity boards and converting the past losses to equity.

    In December 2012 a proposal for licensing of land to concessionaires for the development of ports

    was approved by the govt. this would lead to better development of trade and commerce.

    19

  • POINTS TO REMEMBER

    Clauses should be specific, precise and unambiguous in transaction documents involving

    multiple jurisdictions.

    Governing law Indian law - when an Indian entity is involved and especially if the assets

    are located in India. Resulting in efficacious remedies rather than when the governing law

    is that of a foreign country and must be interpreted by Indian courts, or if an order of a

    foreign court must be enforced in India.

    Specifically exclude conflict of laws principles - Conflict of laws principles can generate

    substantial subjectivity that could become an obstacle for a party legitimately seeking

    relief for a breach. This will ensure that even if the subject matter of a dispute is capable

    of being covered under different agreements and subject to different governing laws,

    Indian courts will uphold the terms of the contract specifically subjected to Indian law.

    Ensure uniformity and alignment between applicable laws, rules, venue and forum for

    arbitration, enforcement of foreign judgments and awards in India, apart from considering

    the logistics of perhaps having to manage multi-jurisdictional legal teams, including the

    costs.

    20

  • THANK YOU

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